First Full Quarter of Revenue from
Operations
TORONTO, March 26, 2019
/CNW/ - Newstrike Brands Ltd. (TSXV:HIP) (the "Company")
today announced financial results for the three months and year
ended December 31, 2018. The
Company's wholly-owned subsidiary, UP Cannabis Inc. ("Up
Cannabis"), is a licensed producer of cannabis and related
products under the Cannabis Act, 2018 (the "Cannabis
Act"). The Company's interim financial statements and
management's discussion and analysis for the three months and year
ended December 31, 2018 are available
on SEDAR at www.sedar.com.
FOURTH QUARTER ENDED DECEMBER 31,
2018 HIGHLIGHTS
- The Company recognized sales of cannabis to the adult-use and
wholesale markets in excess of $5.3
million;
- Gross margins before the fair value adjustment on the sale of
this inventory was $2.5 million, or
53.5% of net revenue;
- Between October 9 to 11, 2018, Up
Cannabis took over Toronto's
Yonge-Dundas Square for its official 'Meet Up' in anticipation of
the of legalization of adult-use cannabis. At Yonge-Dundas Square,
Up Cannabis educated members of the general public about the
responsible use of cannabis through activities including free
outdoor yoga classes, live visual art displays, breakdance battles,
live recordings of the Into the Weeds Podcast, and free concerts by
Canadian artists, including Meghan
Patrick and members of The Tragically Hip;
- On November 12, 2018, Health
Canada issued an amendment to the Company's licence, allowing Up
Cannabis to sell cannabis produced from its Niagara Facility in
dried marihuana form to all authorized persons in accordance with
the Cannabis Act;
- On December 11, 2018, the Company
completed its acquisition of a minority interest in Neal Brothers
Inc. and incorporated a joint venture entity in connection
therewith for the development of specialty food products which will
be infused, derived or otherwise include cannabis in advance of the
contemplated regulatory regime for edibles; and
- On December 12, 2018, the Company
received initial purchase orders from PEI Cannabis Management
Corporation ("PEICMC") for adult-use cannabis products.
SUBSEQUENT EVENTS
- On January 8, 2019, the Company
announced that it was accepted by the Manitoba Liquor and Lotteries
Corporation as an official supplier of adult-use cannabis to that
province's private sector retailers, making it the seventh Canadian
province with which the Company has announced supply
agreements;
- On February 7, 2019, the Company
entered a definitive supply agreement with ZYUS Life Sciences Inc.
for the purchase of dried bulk cannabis from Up Cannabis;
- On February 14, 2019, the Company
announced that an Up Cannabis "Experiential Hub" would be featured
prominently in Ontario's first
Spiritleaf store in Kingston,
Ontario, with a targeted opening date of April 1, 2019, to coincide with the proposed
launch of cannabis retail stores throughout Ontario; and
- On March 13, 2019, the Company
announced its execution of a definitive arrangement agreement with
HEXO Corp (TSX: HEXO; NYSE-A: HEXO) ("HEXO"), pursuant to which,
subject to customary regulatory, court and shareholder approvals,
HEXO will acquire all of the outstanding common shares of Newstrike
; and
- On March 25, 2019 the Company
announced that it had entered into a supply agreement with Cannabis
New Brunswick, marking Up Cannabis' eighth retail cannabis
provincial market.
SELECTED SUMMARY OF QUARTERLY RESULTS
Expressed in CDN
$000's
|
Fourth
Quarter
2018 ($)
|
Fourth
Quarter
2017($)
|
$
change %
change
|
|
December 31,
2018 YTD ($)
|
December 31,
2017 YTD ($)
|
$
change
%
change
|
Gross
Revenue
|
5,336
|
-
|
5,336 NM
|
|
8,972
|
-
|
8,972 NM
|
Excise
Tax
|
(684)
|
|
(684) NM
|
|
(899)
|
-
|
(899) NM
|
Net
Revenue
|
4,652
|
-
|
4,652 NM
|
|
8,073
|
-
|
8,073 NM
|
Inventory production
costs expensed to
cost of sales
|
(2,160)
|
-
|
(2,160) NM
|
|
(4,514)
|
-
|
(4,514) NM
|
Gross margin before
the undernoted
|
2,492
|
-
|
2,492 NM
|
|
3,559
|
-
|
3,559 NM
|
Fair value changes
in biological assets
included in inventory sold
|
(2,219)
|
-
|
(2,219) NM
|
|
(3,276)
|
-
|
3,276 NM
|
Unrealized (loss) /
gain on changes in
fair value of Biological Assets
|
13
|
3,020
|
(3,007)
99%
|
|
938
|
3,020
|
(2,082)
(69%)
|
Gross
Margin
|
285
|
3,020
|
(2,735)
(91%)
|
|
1,221
|
3,020
|
(1,799)
(60%)
|
Expenses
|
(7,479)
|
(3,035)
|
(4,444)
146%
|
|
(31,634)
|
(8,674)
|
(22,960)
265%
|
Loss from
operations
|
(7,194)
|
(15)
|
(7,179)
47,860%
|
|
(30,413)
|
(5,654)
|
(24,759)
438%
|
Other
Items
|
697
|
(1,052)
|
1,749 NM
|
|
10,227
|
(8,436)
|
18,663 NM
|
Net
Loss
|
(6,497)
|
(1,067)
|
(5,430)
509%
|
|
(20,186)
|
(14,090)
|
(6,096)
43%
|
Other Comprehensive
Loss
|
(2,927)
|
-
|
2,927 NM
|
|
310
|
-
|
310 NM
|
Net and
Comprehensive Loss
|
(9,423)
|
(1,067)
|
(8,356)
783%
|
|
(19,876)
|
(14,090)
|
(5,786)
(41%)
|
Net Loss per
share (basic and
diluted)
|
(0.01)
|
(0.00)
|
(0.01) NM
|
|
(0.04)
|
(0.06)
|
0.02
(45%)
|
During the three month period ended December 31, 2018, the Company generated net
revenue of $4,652 (December 31, 2017 - $Nil). $2,611 of revenue was from shipments of dried
cannabis to the provincial government wholesale distributors in
Alberta, British Columbia, Nova Scotia, Ontario and Prince
Edward Island for the adult-use market. $2,041 of revenue was from wholesale sales of
cannabis.
During the three month period ended December 31, 2018, $2,160 of costs incurred during the production
process and capitalized to inventory were expensed upon initial
sale of inventory. This resulted in gross margin of $2,492 (53.5% of net revenue) before the fair
value adjustment on the sale of this inventory. The expense of
$2,219 for the fair value changes in
biological assets included in inventory sold represents the amount
of non-cash fair value adjustment being realized upon the sale of
this inventory.
For the three month period ended December
31, 2018, the Company recognized a gain of $13 (December 31,
2017 - $3,020) related to the
fair value adjustments of Biological Assets. This resulted in gross
margin for the three month period ended December 31, 2018 of $285 (December 31,
2017 - $3,020). The unrealized
gain on fair value changes in biological assets for the three month
period ended December 31, 2018 was
due to the production of cannabis at both production facilities,
offset by the start-up and ramp-up costs in the Niagara Facility.
During 2017, the Company valued its biological assets at cost until
it received approval on its license amendment to allow for sales of
cannabis. Revaluation of the biological assets resulted in an
unrealized gain on fair value changes of $3,020 for the three month period ended
December 31, 2017.
For the three month period ended December
31, 2018, total expenses were $7,479 (December 31,
2017 - $3,035). The Company's
major expenses incurred during the quarter relate to: selling,
general, and admin expense of $2,138;
sales, marketing and business development expense of $1,988; wages and benefits of $2,342; consulting and professional fees of
$774; and other costs related to
share-based compensation, rent and facilities and amortization.
Included in other items is net interest income of $708 offset by accretion and interest expenses of
($11). Other comprehensive loss is
comprised of the fair market value change recognized on strategic
investments made in other Canadian cannabis businesses in 2018.
The Company recorded a net loss of $6,497 and a net and comprehensive loss of
$9,423, or a net loss per share of
$0.01.
Adjusted EBITDA loss for the three month period ended
December 31, 2018 was $4,367.
STRONG FINANCIAL POSITION
As at December 31, 2018 the
Company had total assets of $152,808,
including cash and cash equivalents of $96,640, up from total assets of $24,881, including cash and cash equivalents of
$811 as at December 31, 2017. The increase is due to the net
proceeds from the two bought deal equity offerings, the receipt of
a termination fee comprising $9,500
in connection with the termination of an arrangement agreement with
CanniMed Therapeutics Inc. on January 24,
2018, and the increase in fair market value of its strategic
investments.
As at December 31, 2018, the
Company's inventory of dried cannabis was $2,944 and the fair value of the biological
assets was $4,073. It is expected
that the biological assets will yield approximately 2,300 kilograms
of cannabis.
NIAGARA FACILTY UPDATE
As at the date of this press release, the retrofit of the
Niagara Facility has been completed with infrastructure in place to
support full run-rate production of 20,000 kg of dried cannabis
annually. Cannabis is being cultivated in the new section of the
retrofitted greenhouse with several harvests having already taken
place. The current budget to complete the retrofit, construction of
processing areas and the second greenhouse is $38.2 million, and costs incurred to date are
$19.1 million.
As at the date of this press release, the construction of the
second greenhouse and headhouse expansion is progressing as
planned, with an occupancy permit having already been issued by the
municipality for the new headhouse. The second greenhouse has its
structure erected, walls and roof installed and is progressing with
electrical, heating, ventilation and air conditioning work.
Assuming no interruptions in the construction schedule, the
completion of the construction of the entire Niagara Facility
(including the new processing administration areas and new
greenhouse) is expected towards the end of the second quarter of
2019.
Assuming the full ramp up, including the construction of the new
greenhouse and processing areas at the Niagara Facility, which is
currently in progress, and the continued operational efficacy of
the Brantford Facility, the complete potential aggregate annual
production for all facilities will be approximately 42,000 kg of
dried cannabis. This estimate is subject to change based on
realized plant yields experienced.
NON-IFRS FINANCIAL MEASURES
The Company's "Adjusted EBITDA" is a Non-IFRS metric used by
management that does not have any standardized meaning prescribed
by IFRS and may not be comparable to similar measures presented by
other companies. Management defines the Adjusted EBITDA as the
Income (loss) for the period, as reported, before accretion and
interest, tax, and adjusted for removing the share-based
compensation expense, depreciation and amortization, and the fair
value effects of accounting for biological assets and inventories.
Management believes "Adjusted EBITDA" is a useful financial metric
to assess its operating performance on a cash basis before the
impact of non-cash items. A reconciliation of net income to EBITDA
is presented below:
Adjusted EBITDA
Expressed in CDN 000's
|
Fourth Quarter
2018 ($)
|
Fourth Quarter
2017 ($)
|
December 31,
2018 YTD ($)
|
December
31, 2017 YTD ($)
|
Loss from operations
– as reported
|
(7,194)
|
(15)
|
(30,413)
|
(5,654)
|
Fair value changes
in biological assets
included in inventory sold
|
2,219
|
-
|
3,276
|
-
|
Unrealized
gain on changes in fair value of
biological asset
|
(13)
|
(3,020)
|
(938)
|
(3,020)
|
Share-based
compensation expense
|
96
|
645
|
8,324
|
3,391
|
Depreciation and
amortization
|
525
|
219
|
1,494
|
808
|
Adjusted
EBITDA
|
(4,367)
|
(2,171)
|
(18,257)
|
(4,475)
|
About Newstrike and Up Cannabis
Newstrike is the
parent company of Up Cannabis Inc., a licensed producer of cannabis
that is licensed to both cultivate and sell cannabis in all
acceptable forms. Newstrike, through Up Cannabis and together with
select strategic partners, including Canada's iconic musicians The Tragically Hip,
is developing a diverse network of high quality cannabis brands.
For more information visit www.up.ca or www.newstrike.ca.
Forward-Looking Information
This news release contains
forward-looking statements. Forward-looking statements involve
known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of Newstrike
to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements. Often, but not always, forward-looking statements can
be identified by the use of words such as "plans", "expects" or
"does not expect", "is expected", "estimates", "intends",
"anticipates" or "does not anticipate", or "believes", or
variations of such words and phrases or state that certain actions,
events or results "may", "could", "would", "might" or "will" be
taken, occur or be achieved. These forward-looking statements
include, but are not limited to, statements relating to Newstrike's
expectations with respect to its performance and achievements
including expected sales and construction timeline and completion,
production ramp-up, the legalization of new classes of cannabis,
the completion of the plan of arrangement contemplated under the
Arrangement Agreement. Accordingly, readers should not place undue
reliance on the forward-looking statements and information
contained in this press release. Since forward-looking statements
and information address future events and conditions, by their very
nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently
anticipated due to a number of factors and risks. Readers are
cautioned that the foregoing list of factors is not exhaustive. The forward-looking statements contained in this news release are
made as of the date of this release and, accordingly, are subject
to change after such date.
Newstrike does not assume any obligation to update or revise any
forward-looking statements, whether written or oral, that may be
made from time to time by us or on our behalf, except as required
by applicable law.
Neither TSX Venture Exchange nor its
Regulation Services Provider (as that term is defined in the
policies of the TSX Venture Exchange) accepts responsibility for
the adequacy or accuracy of this release.
SOURCE Newstrike Brands Ltd.